How to Calculate Sharpe Ratio from Daily Returns

To calculate the Sharpe Ratio from daily returns, follow these steps:

1. Calculate the average daily return by summing all daily returns and dividing by the total number of days.
2. Subtract the risk-free rate (such as the Treasury bill rate) from the average daily return.
3. Calculate the standard deviation of daily returns, which measures the volatility.
4. Divide the adjusted average daily return by the standard deviation to get the Sharpe Ratio.

Sharpe Ratio Calculator

Enter daily returns (comma-separated): Calculate Sharpe Ratio

FAQs

1. How do you calculate Sharpe from daily returns? The Sharpe ratio is calculated by dividing the excess return of the investment/portfolio by its standard deviation. The formula is: Sharpe Ratio = (Mean of Daily Returns – Risk-Free Rate) / Standard Deviation of Daily Returns.
2. How do you calculate Sharpe ratio from annual returns? To calculate the Sharpe ratio from annual returns, you can use the formula: Sharpe Ratio = (Mean of Annual Returns – Risk-Free Rate) / Standard Deviation of Annual Returns.
3. What is the formula for calculating the Sharpe ratio? The formula for calculating the Sharpe ratio is: Sharpe Ratio = (Mean of Returns – Risk-Free Rate) / Standard Deviation of Returns.
4. How do you calculate Sharpe ratio from monthly returns in Excel? You can calculate the Sharpe ratio from monthly returns in Excel using the formula: =(AVERAGE(Monthly Returns) - Risk-Free Rate) / STDEV.P(Monthly Returns).
5. How do you calculate Sharpe in Excel? Use the formula: =(AVERAGE(Returns) - Risk-Free Rate) / STDEV.P(Returns).
6. What is the Sharpe ratio of the CAPM? The Capital Asset Pricing Model (CAPM) doesn’t inherently have a Sharpe ratio. The Sharpe ratio is a measure of risk-adjusted return and is used to evaluate the performance of an investment or portfolio.
7. What is the formula for daily return? The formula for calculating daily return is: Daily Return = (Ending Price – Starting Price) / Starting Price.
8. What is the formula for daily return on investment? The formula for calculating the daily return on investment is the same as the formula for daily return mentioned above: Daily Return = (Ending Value – Starting Value) / Starting Value.
9. What is the Sortino ratio from daily returns? The Sortino ratio is a measure of risk-adjusted return that focuses on downside risk. It’s calculated similarly to the Sharpe ratio but only considers the standard deviation of negative returns. The formula is: Sortino Ratio = (Mean of Returns – Risk-Free Rate) / Standard Deviation of Negative Returns.
10. How do you convert daily Sharpe ratio to annual Sharpe ratio? To convert the daily Sharpe ratio to an annualized Sharpe ratio, multiply the daily Sharpe ratio by the square root of the number of trading days in a year. Typically, there are around 252 trading days in a year.
11. Why do we calculate Sharpe ratio? The Sharpe ratio is calculated to measure the risk-adjusted return of an investment or portfolio. It helps investors compare the return they are receiving for the level of risk they are taking.
12. What does a Sharpe ratio of 0.5 mean? A Sharpe ratio of 0.5 means that for every unit of risk (standard deviation) the investment/portfolio is taking, it is generating a return that’s 0.5 times the risk-free rate.
13. Is Sharpe ratio calculated monthly? The Sharpe ratio can be calculated using daily, monthly, or annual returns, depending on the context and the data available.
14. How do you calculate Sharpe ratio for 5 years? To calculate the Sharpe ratio for 5 years, use the annualized mean return and standard deviation of returns for the 5-year period in the Sharpe ratio formula.
15. What is the Sharpe ratio in time series? The Sharpe ratio in a time series context measures the risk-adjusted return over a specific time period, taking into account the volatility of the returns.
16. How do you annualize monthly returns? To annualize monthly returns, multiply the average monthly return by 12 and the standard deviation of monthly returns by the square root of 12.
17. Is Sharpe ratio measured in percentage? The Sharpe ratio is not measured in percentage; it’s a ratio that indicates the risk-adjusted return per unit of risk.
18. What is the formula for forecasting in Excel? The formula for forecasting in Excel depends on the forecasting method you’re using. For example, if you’re using linear regression, you can use the FORECAST function.
19. What is Sharpe ratio of a portfolio? The Sharpe ratio of a portfolio is a measure of the portfolio’s risk-adjusted return. It takes into account both the portfolio’s return and its risk (volatility).
20. What is the difference between Sharpe ratio and information ratio? The Sharpe ratio measures the risk-adjusted return of an investment/portfolio relative to a risk-free rate, while the information ratio measures the risk-adjusted return relative to a benchmark.
21. What is the difference between beta and Sharpe ratio? Beta measures the sensitivity of an investment/portfolio’s returns to the overall market returns, while the Sharpe ratio measures the risk-adjusted return of an investment/portfolio relative to its risk.
22. How to do a daily average formula in Excel? To calculate the average of a range of daily returns in Excel, use the AVERAGE function, e.g., =AVERAGE(A2:A100).
23. How do you calculate daily return from weekly returns? To calculate daily return from weekly returns, you can use the formula: ((Weekly Return + 1)^(1/5)) - 1. This assumes there are 5 trading days in a week.
24. How do I graph daily returns in Excel? You can create a line chart in Excel to graph daily returns. Enter the daily returns in one column and corresponding dates in another, then create a line chart using the data.
25. What is the difference between daily return and monthly return? The difference is in the frequency of the returns. Daily returns are calculated and represent the change in value from one day to the next, while monthly returns represent the change in value over a month.
26. What is the difference between IRR and ROI? The Internal Rate of Return (IRR) is the rate at which an investment breaks even, while Return on Investment (ROI) is a measure of the profitability of an investment relative to its cost.
27. Is Sortino ratio better than Sharpe ratio? The Sortino ratio is considered better than the Sharpe ratio by some investors because it focuses on downside risk and penalizes negative returns more heavily.
28. Why is Sortino ratio better than Sharpe ratio? The Sortino ratio is often preferred by some investors because it provides a more focused measure of risk-adjusted return by only considering the downside volatility.
29. What is sp500 daily Sharpe ratio? The daily Sharpe ratio of the S&P 500 would require the daily returns of the S&P 500 index as well as the risk-free rate to calculate.
30. How do you calculate the Sharpe ratio of Morningstar? Morningstar calculates the Sharpe ratio of mutual funds by using the fund’s average annual return minus the risk-free rate, divided by the standard deviation of the fund’s returns.
31. What does a Sharpe ratio of 0.25 mean? A Sharpe ratio of 0.25 means that for each unit of risk (standard deviation) the investment is taking, it’s generating a return that’s 0.25 times the risk-free rate.
32. What does a Sharpe ratio of 1 mean? A Sharpe ratio of 1 means that for each unit of risk (standard deviation) the investment is taking, it’s generating a return that’s equal to the risk-free rate.
33. Why not to use Sharpe ratio? The Sharpe ratio has limitations, such as assuming a normal distribution of returns and considering only the first two moments of the return distribution. It might not fully capture all aspects of an investment’s risk.
34. How do you use the Sharpe ratio? The Sharpe ratio is used to compare the risk-adjusted returns of different investments or portfolios. A higher Sharpe ratio generally indicates a better risk-adjusted return.
35. What is a good 3 year Sharpe ratio? A good 3-year Sharpe ratio depends on the context and the type of investment. Generally, a higher Sharpe ratio is better as it indicates a higher risk-adjusted return.
36. What is a good Sharpe ratio negative? A good Sharpe ratio, even if negative, should be compared to other investments in the same context. A negative Sharpe ratio indicates that the investment’s return is not sufficiently compensating for the risk taken.
37. Can a Sharpe ratio be less than 0? Yes, a Sharpe ratio can be less than 0, especially if the investment’s return is lower than the risk-free rate or if the investment’s volatility is very high.